Mongolia’s decision to use broad gauge rail for a new line to China will increase costs for coal exporters, including Hong Kong-traded Mongolia Mining Corp. (975), according to a research firm.

The use of the broad gauge rail will add $3 to the cost of each metric ton of delivered coal because the fuel has to be transferred at the border to wagons that fit the smaller gauge rail used in China, Dale Choi, founder of Ulaanbaatar-based Independent Mongolian Metals and Mining Research, said by phone.

South Korea’s second-largest builder, Samsung C&T Corp was awarded a $483 million contract this week to build the 267-kilometer railway from the Tavan Tolgoi coal field to the Chinese border. Mongolia’s rail network is broad gauge, a legacy of its Communist era when most of its infrastructure was developed by the Soviet Union, that’s 85 millimeters wider than the standard gauge used in China, the largest energy consumer.

“The business community would have preferred the standard gauge,” Choi said. “The government is taking some steps to increase efficiency, such as mine site customs, so one wonders why they would choose the Russian gauge. I guess the geo-political consideration is much more important to authorities.”

Mongolia’s biggest state-owned coal company, Erdenes Tavan Tolgoi LLC, may also use the new railroad. Both Erdenes TT and Mongolia Mining mine the giant Tavan Tolgoi coal field, with 6.4 billion tons of reserves, and currently truck their coal to the border on a paved road.

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It’s possible to export eight or nine million tons a year to the border by road while rail can transport 28 million tons, Delgersaikhan Tsagaan-Uvgun, head of mine planning and technical coordination at Erdenes TT, said in an interview. Erdenes TT, which is planning to sell shares to global investors by 2015, aims to export 20 million tons of coal a year by 2017.

Russia developed its wider gauge in the 19th century as military tactic to prevent an invasion by rail and the broad gauge is still in use across most of the former Soviet empire.

Although economically tied to China with over 92 percent its exports heading across the southern frontier, Mongolia has attempted to buffer itself against Chinese economic overtures. Last year it passed a Foreign Investment Law to block the sale of SouthGobi Resources Ltd. to China’s state-owned Aluminum Corp. of China Ltd.

Mongolia has 1,908 kilometers of broad gauge track with plans to expand the network by 5,600 kilometers to help mining companies export their products. The country is rich in gold, copper, coal and other minerals and is seeking opportunities to exploit its reserves and its $10 billion economy.
 
The 267-kilometer section from Tavan Tolgoi to the Chinese border will be the first part of this expansion, according to the Mongolian government. The next section is planned to connect Tavan Tolgoi and the city of Sainshand, the site of a $10 billion planned industrial complex.